Coronavirus ‘will have profound
● Nation’s finances facing terrible uncertainty with fiscal commission saying it’s too early to predict full effects
Scotland’s finances have been plunged into “considerable uncertainty” by the coronavirus lockdown and an impending recession will have a “profound” impact on the economy, the Scottish Fiscal Commission (SFC) has warned.
Analysis by the SFC looked at the financial consequences of coronavirus and any impact from the UK Budget, announced after the Scottish Government revealed its spending plans for the year.
With the severity and duration of the pandemic – as well as the length of lockdown measures – not yet known, the commission said it is too early to accurately predict just how damaging Covid-19 will be to the Scottish economy.
Scottish Government income from devolved taxes such as the Land and Buildings Transaction Tax and the Scottish Landfill Tax is expected to be lower than forecast, while social security spending will be higher as more Scots claim benefits.
The SFC suggests these financial blows could be offset by block grant adjustments as part of the devolution settlement because the UK government will experience similar changes.
But it said Scotland’s spending ability could be damaged in coming years by falling income tax revenue.
“We expect income tax revenues to be heavily affected,” the SFC report said, although any potential consequences will not be felt until the 2023-24 financial year when any reconciliations will affect Scotland’s block grant.
The extent to which this will impact the Scottish budget will depend on the relative differences in Scottish and UK income tax performance in 2020-21, rather than the actual drop in income tax collected in Scotland, it said.
A key factor in this could be whether the Scottish Government’s financial support for businesses and individuals – in which it has diverged from the UK government’s measures – have been more or less effective at protecting jobs and income.
Since the coronavirus pandemic struck, the UK and Scottish Governments have announced significant additional spending to mitigate the impact of the virus.
But the SFC said this has caused “considerable uncertainty about the economic and fiscal effects for Scotland”.
The report adds the impact of coronavirus on the economy will ultimately depend on the extent of the necessary public health interventions and how long they last, balanced against the success of national and international economic interventions.
Warning a global recession seems inevitable due to the lockdown, the SFC report states: “It is an unprecedented combination of a supply-side shock, a demand-side shock and potentially a financial system shock, and will lead to significant changes in government fiscal policy and public debt.
“It will have profound and varying economic consequences in the short, medium and long-term.”
Highlighting areas where Scotland’s economy could be disproportionately damaged, it states: “The oil and gas sector is likely to be affected by the large drop in oil prices and tourism is likely to see a significant contraction as both international and domestic travel are restricted.
“Oil and gas and tourism are both important industries for Scotland, forming a larger part of the Scottish economy than the UK economy, and this could lead to a larger negative shock in Scotland than the UK.”
Finance secretary Kate Forbes said: “The Covid-19 pandemic is having severe economic consequences for people across Scotland and the government is doing everything we can to mitigate that impact.
“The Scottish Fiscal Commission’s report highlights the particular challenges faced by the Scottish Government,
“It is an unprecedented combination of a supply-side shock, a demand-side shock and potentially a financial system shock”
SFC
due to uncertainty over the funding levels from the UK government and required spending levels in Scotland.
“The current global situation proves yet again that we need more fiscal levers, including an increase to the limits on our borrowing and reserve powers, to manage Scotland’s public finances effectively.”
A separate study by KPMG yesterday said Edinburgh is most susceptible to an economic hit due to Covid-19 restrictions as Scotland faces a loss of more than 8 per cent in growth. The group is forecasting negative gross value added (GVA) north of the Border of at least 8.1 per cent in 2020.